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11 July of 2017

When looking for ways to enter the global markets, people who do not have huge amounts of money to invest are most likely to do so through Forex and CFDs trading. These trading instruments are being traded on online platforms which are designed to be very straightforward and intuitive.

What exactly is Forex anyway?

When we say forex what we actually mean is Foreign Exchange. This means that we exchange foreign currencies on the global markets. However, when it comes to forex online trading, you don’t have to own certain currency as you are trading the contracts based on their price movement.

Forex is without a doubt the world’s largest financial market where almost 5 trillion USD is being traded on the daily basis. This is, obviously, just a part of a bigger trading framework.

If we wanted to present this via a simple example, you would need to imagine a big car company that needs to get their parts from a production facility in one country to their production line in another company. They are making their profit in one currency (let’s say EUR) but need to pay for the car parts in another currency (for example CAD). This car company will need to use forex to exchange their currency for the one that they need to pay in. Obviously, there are millions of such transactions happening on the daily, whether big or small, that influence the market fluctuations and offer opportunities for traders to try and predict the actual movement of the currencies and subsequently make money on it.

Forex in a nutshell

So in a nutshell, when trading forex through online platforms, the investors are attempting to make a correct prediction of the exchange rate’s movement that will happen in the future. Here’s a practical example:

Let’s say we are using EUR and USD – so the pair EUR/USD is 1.1412. In this particular example, the EUR is the base currency and USD is the quote currency. If you predict that the base currency will get stronger you will “go long” or you can buy the currency. If you think that the currency will lose value, you will go short or sell it for some other currency.

After you have made this decision, you will notice that the exchange rate will fluctuate depending on various factors that are important for the financial markets. Getting back to the example, we’ll say that you opted to go long and bought 100 EUR for 114.12 USD.

Simultaneously, the context is such that the economy of the Euro Area improved and EUR gained in value. Consequently, clearly the exchange rate increased from the previous 1.1412 to a current 1.1362. So if you bought 100 EUR in USD, the value of the EUR increased $0,0050 x 100 = 0.5 USD, meaning that if you decided to sell your EUR, you would profit from the exchange.

Trading CFDs on the financial markets

CFDs are a type of financial instrument that refers to the difference between the strike price and the closing price on a particular asset: shares, commodities, indices, treasuries… The acronym stands for Contracts for Difference.

As an example, we can imagine that you decided to buy CFD that is based on the Apple stock that was at the time 150 USD for one share.

If your prediction is that the price will rise than you are going to enter a ‘’long’’ position by buying. If you, by contrast, think that the price will be dropping, you will be selling, that is ‘’going short’’. If your chosen prediction was correct after the closing of the contract, your profit will be calculated on the difference between the price you bought the contract at and the price which was current at the moment of selling (closing price). Obviously, if your prediction was not correct, the amount lost will be removed from your trading account.

When you decide to invest time, and money into this type of online trading, make sure that you have covered your bases by educating yourself on the helpful strategies and methods of trading. Just going in and placing trades will obviously not suffice.